Chapter 5

Spoilage, Rework Units and Scrap

Spoilage (Defective): are units of production whether fully or partially complete that don’t meet
the standard required by customers for good units and that are discounted or sold for reduced
price. Example: defective shirts, shoes, electronic devices.
Reworks: are units of production that don’t meet the standard required by customers for finished
units that are subsequently repaired and sold as acceptable finished unit.
Scrap (By product): are materials left over when making a product. They have low sale value
compared with the sale value of the main products.
Example: short lengths from wood working operations, frayed cloth etc.
Types of Spoilage
Normal spoilage: is spoilage inherent in a particular production process that arises even under
efficient operating condition. Depending on the production process, management decides the
spoilage it considers normal.
Cost of normal spoilage is typically included as a component of cost of good unit’s manufactured
because good units can be made without also making some units that are spoiled. Normal
spoilage is inventor able costs. The managements are tolerating small amount of spoilage as
normal.
Abnormal spoilage: is spoilage that would not arise under efficient operation condition. It is not
inherent in a particular production process. It arises because of machine breakdown and
operator’s error. Abnormal spoilage is usually avoidable or controllable. Abnormal spoilage cost
is recorded separately and treated as loss of the current year. Costs of abnormal spoilage are not
considered as inventor able costs and are written off as costs of the period in which detection
occurs.
Two Approaches of Treating Normal Spoilage
 Approach A: counting spoiled units when computing out put in equivalent units
 Approach B: not counting spoiled units when computing output in equivalent unit Approach
A better than approach B because
 In approach B, WIP ending is changed for spoilage twice
 Approach A high lights cost of normal spoilage, this will help management take action to
minimize normal spoilage
Example 1: Counting and not Counting Spoiled Unit
Chipmakers, incorporation manufactures computer chip for TV set, all direct material is added
at the beginning of the production process. In May 2003, $270,000 direct material was
introduced in to the production process. Production data for may indicate 10,000 units were
started, 5,000 units were completed and 1,000 units were spoiled (all normal spoilage). No
beginning WIP. Ending WIP was 4,000 units, each unit 100% complete as to direct material
cost. Spoilage is detected up on completion of the process.
Requirement: Assign direct material cost to completed units and units in WIP ending using
approach A&B. Solution
Approach A Approach B
1. Costs to account for $270,000 $270,000
2. Equivalent Units
- Completed & T.O ……………... 5,000 5,000
- Ending WIP …………………... 4,000 4,000
- Normal Spoilage ……………… 1,000 -----
- EU of Work done to date 10,000 9,000

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 3. Cost per EU of work done (1/2) $27 $30
4. Assignment of Costs
- Good units completed & T. O
- A: 27 x 5,000 ………………………….. $135,000
- B: 30 x 5,000 …………………………... ……………… $150,000
5. Normal Spoilage
- A: 27 x 1,000 ………………………….. $27,000
- B: no counting ………………………… ……………… ------
6. Total cost of good units completed & T.O $162,000 $150,000
7. Ending WIP
- A: 27 x 4,000 ………………………… $108,000
- B: 30 x 4,000 ………………………… …………….. $120,000
8. Total cost Counted for ………………….. $270,000 $270,000

The Five Step Procedure for Process Costing With Spoilage

Example 2: Spoilage using WA and FIFO
ABC Company manufactures a wooden recycling container in its forming department. Direct
materials for this product are added at the beginning of the production cycle. Conversion costs
are added evenly during production. Some units of this product are spoiled as result of defects,
which are detected only up on inspection of finished units. Normally spoiled units are 10%of the
good units completed. That is for 10 good units produced; there is one of normal spoilage.
Summarized data for July 2003 are
Physical units for July 2003
WIP beginning …………………………………1,500
DM: 100%complete
CC: 60%complete
Started during July ……………………………….8, 500
Completed and transferred out ……………………7,000
WIP ending ………………………………………..2,000
DM: 100% complete
CC: 50%complete
Total cost for July
WIP beginning
DM: ……………………………….12, 000
CC: ………………………………….9, 000…………………21,000
DM cost added during July …………………………………….....76,500
CC cost added during July …………………………………………89,100
Total cost to account for …………………………………………..186,600
Requirements: using WA&FIFO
A. Identify units of both normal and abnormal spoilage
B. Summarize the flow of physical unit
C. Compute output in terms of equivalent unit
D. Compute cost per equivalent unit
E. Summarize total cost to account for
F. Assign total cost to unit completed and to units in ending WIP
G. Compare the result under WA&FIFO
H. Record the required journal entry
Solution
The five steps procedure for process costing with spoilage
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Using WA method
a) Total Spoilage = [Unit in Beg. WIP + Units Started in Current Period] –
[Good Units Completed + Units in Ending WIP]
= [1,500 + 8,500] – [7,000 + 2,000]
= [10,000 – 9,000] = 1,000
Normal Spoilage = 10% of 7,000 = 700 ; Abnormal Spoilage = 1,000- 700 = 300
b) Physical flow of Units Physical Units
- Beginning WIP ……………………. 1,500
- Started during July …………… 8,500
- Units to account for ………………… 10,000
- Good Units Completed & T.O ……. 7,000
- Ending WIP ………………………... 2,000
- Normal Spoilage ………………………. 700
- Abnormal Spoilage …………………….. 300
- Units accounted for ……………….... 10,000
c) Equivalent Unit of Production Equivalent Units
DM CC
- Good Units Completed & T.O 7,000 7,000
- Normal Spoilage ………………………. 700 700
- Abnormal Spoilage …………………….. 300 300
- Ending WIP - DM: (100% x 2,000) 2,000
- CC: (50% x 2,000) ……… _____ 1,000
- Total EU for Work done in current period 10,000 9,000
d) Cost per EU Equivalent Unit Cost
DM CC Total
- Beginning WIP ….……………………. $12,000 $9,000 $21,000
- Cost added during July ……….………… $76,500 $89,100 $165,600
1. Cost incurred to date ………………….. $88,500 $98,100
2. Equivalent Units (EU) to date …………. 10,000 9,000
3. Cost per EU (1/2) ……………………. $8.85 $10.9
e) Total Cost to account for $186,600
f) Assignment of Costs
DM CC Total
- Good Units Completed and T.O (7,000)
 DM: $8.85 x 7,000 …....................... 61,950
 CC: $10.9 x 7,000 ………………….. ………..... 76,300
- Total cost for good units Completed & T.O ………….. ………… 138,250
- Normal Spoilage (700)
 DM: $8.85 x 700 …....................... 6,195
 CC: $10.9 x 700 ………………….. …………. 7,630
- Total cost for Normal Spoilage …………… …………. …………. 13,825
- Total cost for good units Completed & T.O …………... ……….. 152,075
- Abnormal Spoilage (300)
 DM: $8.85 x 300 …....................... 2,655
 CC: $10.9 x 300 ………………….. …………. 3,270
- Total cost for Abnormal Spoilage ………… …………. …………. 5,925
- Ending WIP (2,000 units)
 DM: $8.85 x 2,000 …..................... 17,700
 CC: $10.9 x 1,000 ……………….. …………. 10,900
- Total Cost of Ending WIP ……………….. …………. ………… 28,600
Total cost accounted for 186,600
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 Using FIFO Method
b) Physical flow of Units Physical Units
- Beginning WIP …………………………….. 1,500
- Started during July ……………………… 8,500
- Units to account for ………………………… 10,000
- Good Units Completed & T.O (7,000)
- From WIP Beg. …………………..1,500
- Started & Completed units ………5,500 7,000
- Ending WIP ………………………................... 2,00
- Normal Spoilage …………………………….. 700
- Abnormal Spoilage ………………………….. 300
- Units accounted for ………………................... 10,000
c) Equivalent Unit of Production Equivalent Units
DM CC
- Good Units Completed & T.O (7,000)
- From Beg. WIP (1,500)
DM: 0% x 1,500 ………………………... 0
CC: 40% x 1,500 ……………………….. …………. 600
- Started & completed & T.O (5,500)
DM: 100% x 5,500 …………………… 5,500
CC: 100% x 5,500 …………………….. ……….. 5,500
- Normal Spoilage
- (DM: 100%x700); CC: 100%x700) ……… 700 700
- Abnormal Spoilage
- (DM: 100%x300); CC: 100%x300) ……… 300 300
- Ending WIP - DM: (100% x 2,000) 2,000
- CC: (50% x 2,000) ……… _____ 1,000
- Total EU for Work done in current period 8,500 8,100
d) Cost per EU in July only Equivalent Unit Cost
DM CC Total
- Cost incurred during July ……….…………. $76,500 $89,100 $165,600
1. Equivalent Units (EU) to date ……………. 8,500 8,100
2. Cost per EU (1/2) ………………………….. $9 $11
- Beginning WIP ….………………………….. $12,000 $9,100 $21,000
e) Total Cost to account for $186,600
f) Assignment of Costs
DM CC Total
- Good Units Completed and T.O (7,000)
- From Beg. WIP (1,500) ……………………. …. ………….. …………. $21,000
 DM: $9 x 0 …........................................... $0
 CC: $11 x 600 ……………………….. ………..... $6,600 $6,600
- Started & completed (5,500)
 DM: $9 x 5,500 …............................... $49,500
 CC: $11 x 5,500 ……………………. …………. $60,500 $110,000
- Normal Spoilage (700)
 DM: $9 x 700 …........................................ $6,300
 CC: $11 x 700 ……………………….. …………. $7,700
- Total cost for Normal Spoilage ……………… …………. …………. $14,000
- Total cost for good units Completed & T.O ………….. …………. $151,600

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- Abnormal Spoilage (300)
 DM: $9 x 300 …....................... $2,700
 CC: $11 x 300 ………………….. …………. $3,300
- Total cost for Abnormal Spoilage ………… …………. …………. $6,000
- Ending WIP (2,000 units)
 DM: $9 x 2,000 …..................... $18,000
 CC: $11 x 1,000 ……………….. …………. $11,000
- Total Cost of Ending WIP ……………….. …………. ………… $29,000
Total cost accounted for 186,600
g) Comparison of WA and FIFO Methods
WA FIFO Difference (FIFO-WA)
Completed and Transferred Out $152,075 $151,600 - $475
Abnormal Spoilage $5,925 $6,000 $75
Ending WIP $28,600 $29,000 $400
Total cost account for $186,600 $186,600 0
h) Required Journal Entries
WA FIFO
- To record direct material purchased and used in the Forming department during July
WIP-Forming Department ………………………… 76,500 76,500
Account Payable Control ……………………… 76,500 76,500
- To record consumption of CC in the Forming department during July
WIP-Forming department ……………………….. 89,100 89,100
Various Account ……………………………… 89,100 89,100
- To record cost of goods completed and transferred out to Finished Goods
Finished Goods …….……………………………… 152,075 151,600
WIP-Forming department …………………… 152,075 151,600
- To record cost of loss from Abnormal Spoilage
Loss from Abnormal Spoilage …………………….... 5,925 6,000
WIP – Forming Department ……………………. 5,925 6,000

Additional question (Assignment)

Q1. Daniel manufacturing company uses the weighted average method of process costing. All
direct materials are added at the beginning of the process, and conversion costs are added evenly
during the process. Spoilage units are detected upon inspection at the end of the process and are
disposed at zero net disposal value
Summary data for March 2009 are:
Physical units DM CC
WIP, Nov. 1 1,000 $ 1,423 $ 1,110 = 2,533
Started in Nov ?
Good units completed & transf-
erred –out during Nov 9,000
Normal spoilage in Nov. 100
Abnormal spoilage 50
WIP, Nov. 30 2,000
Costs added during march $12,180 $ 27,750 = 39,930
Degree of completion; direct material, 100%; conversion costs, 50% (as to beginning WIP)
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Degree of completion: direct materials; 100%; conversion cots, 30% (as to ending WIP)
Required: Compute: by using WA&FIFO
1. Equivalent units
2. Cost per equivalent units
3. Assign costs to units completed and transferred-out (normal spoilage, to abnormal spoilage and to units in ending WIP.
4. Compare WA&FIFO
Job Order Costing System; Spoilage, Rework & Scrap

When assigning costs, job costing system generally distinguishes between normal spoilage
attributable to a specific job and normal spoilage common to all jobs.
Normal spoilage attributable to specific job is assigned to that job.
Example 3: In the JK machine shop 5 aircraft parts out of a job a lot of 50 aircraft parts are
spoiled. Costs assigned prior to the inspection point are $2,000 per part. JK calculates these costs
on the basis of it inventory costing assumption WA&FIFO. We do not however emphasize cost
flow assumptions in our presentation here or in subsequent sections. The current disposal price
of the spoiled parts is estimated to be $600 per part. When the spoilage is detected, the spoiled
goods are inventoried at $600per part.
- When normal spoilage occurs because of the specifications of a particular job, that job bears the
cost of the spoilage reduced by the current disposal value of that spoilage
DM-ctrl (spoiled goods at current disposal value): 5*$600…………………3000
WIP-ctrl (specific job):5*$600………………………………………………3000
- Total normal spoilage (5*$2,000per part) 10,000
- Less spoiled goods at current disposal value (5*$600) 3,000
-Net normal spoilage (10,000-3,000) 7,000
-Total cost of 45(50-5) good units (45*$2,000) 90,000
-add net normal spoilage +7,000
Total cost of good units 97,000
Normal spoilage common to all jobs; in some cases, spoilage inherent in production only
confidentially occurs when a specific job is being worked on. The spoilage then is not
attributable and hence is not changed; to the specific job instead it is cosseted as manufacturing
overhead. The journal entry is.
DM ctrl. (Spoiled goods at current disposal value) 5*$600……………………3,000
MOH-ctrl. (Normal spoilage)(10,000-3,000)……………………………………7,000
WIP-ctrl (specific job) 5*$2,000 …………………………………………………..10,000

Abnormal Spoilage: if the spoilage is abnormal, the net loss is highlighted and always charged to
an abnormal loss account. Unlike normal spoilage costs, abnormal spoilage costs are not included
as part of the cost of good units produced the total cost of the 45 (50-5) good units is 90,000
(45units X $2,000
DM ctrl. (Spoiled goods at current disposal value) 5*$600……………………3,000
Loss from.(abnormal spoilage)(10,000-3,000)……………………………………7,000
WIP-ctrl (specific job) 5*$2,000 …………………………………………………..10,000
Even though, for external reporting purposes, abnormal spoilage costs are written off in the
period and are not liked to specific jobs or units, often identify the specific reasons for abnormal
spoilage and where appropriate, link abnormal spoilage with specific jobs or units for cost
management purposes

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 Rework
Rework is unacceptable units of production that are subsequently repaired and sold as
acceptable finished goods for rework, we again distinguish.
1. Normal rework attributable to a specific job
2. Normal rework common to all jobs
3. Abnormal rework
Consider the JK machine shop data example 1. Assume that the five spoiled part used in our
illustration are reworked. The journal entry for the $10,000 of total costs assigned to the five
spoiled unit before considering rework cost are as follows:
WIP-ctrl ……………………………………10,000
DM-ctrl ………………………………………….4, 000
Wages payable-ctrl……………………………….4, 000
MOH-allocated ……………………………………2,000
Assume that rework costs equal ($3,800 (DM $800; DL $2,000; MOH $1,000)
Normal rework attributable to a specific job: - if the rework is normal but occurs of the
requirements of a specific job, the rework costs are changed to that job. The journal entry as
follows
WIP-ctrl ……………………………………3,800
DM-ctrl ……………………………………………800
Wages payable-ctrl………………………………2,000
MOH-allocated ……………………………………1,000
Normal rework common to all jobs when rework is normal and not attributable top any specific
job, the costs of rework are charged to manufacturing overhead and spread, through overhead
allocation over all job.
MOH-ctrl (rework cost) ……………………………………3,800
DM-ctrl ……………………………………………………………800
Wages payable-ctrl…………………………………………………2,000
MOH-allocated ……………………………………………………1,000
Abnormal rework if the rework is abnormal, it is recorded by charging abnormal rework to a
separate loss account.
Loss from abnormal rework ……………………………………3,800
DM-ctrl …………………………………………………………………800
Wages payable-ctrl……………………………………………………....2,000
MOH-allocated …………………………………………………………1,000
Costing rework highlights to managers the resources wasted on activities that would not have to
be undertaken if the product were made correctly. It prompts to seek ways to reduce, rework.
E.g. By designing new products or processes, training workers, or investing in new machines.
Calculating rework costs helps managers perform cost-benefit analyses for various alternative
ways to reduce or eliminate rework. To emphasize the importance of eliminating rework and to
simplify the accounting, some companies set a standard of zero rework. All rework is then
treated as abnormal and written off as a cost of the current period.
Accounting for scrap
Scrap: is material left over when making a product it has low sale value compared with the sale
value of the product. There is no distinction of normal and abnormal scrap, but scarp
attributable to a specific job is distinguished from scrap common to all jobs.
There are two major aspects of accounting for scrap:
1. Planning and control including physical tracking
2. Inventory costing including when and how to affect operating income
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 Recognizing scrap at the time of its sale
To illustrate we extend our JK machine shop example assuming that the manufacture of
aircraft parts generates scrap. We further assume that the scrap from a job has a total sale
value of $900
Cash /a/receivable ………………………………900
Sale of scrap ……………………………………. 900
When the dollar amount of scrap is immaterial, the simplest accounting is to make a memo of
the quantity of scrap returned to store room. There is no entry for this returned scrap.
Scrap attributable to specific job: job order costing systems sometimes trace the sale of scrap to
the jobs that yielded the scrap. This method is used only when the tracing can be done in an
economically feasible way.
Scrap returned to the store room: no entry
Memo of quantity received and related job is entered in the
inventory record
Sale of Scrap Cash / A/receivable ……………………900
WIP-ctrl. ……………………………………. 900
Unlike spoilage and rework, there is no cost attached to the scrap to the specific job. Scrap sale
reduce the cost of the job
Scrap common to all jobs: the journal entry in this case is
Scrap returned to the store room: no entry
Memo of qty received and related job is entered in the
inventory record
Sale of Scrap Cash / A/receivable………………………900
MOH-ctrl. ……………………………………. 900
This method dose not link scrap with any particular job or product instead, all products bear
regular production costs without any credit for scrap sales except in an indirect manner;
The expected sale of scrap are considered when setting the budgeted MOH rate thus, the
budgeted overhead rate is lower than it would be if the OH budget had not been reduced by the
expected sales of scrap. This accounting for scrap is used in both process and job order costing
system.
Recognizing scrap the time of its production
Scrap is some times reused as direct materials rather than sold as scrap. In this case it should be
debited to materials control as a type of direct materials and carried at its estimated net realizable
value
E.g. the entries when the scrap generated is common to all jobs are:
Scrap returned to the store room: DM-ctrl……………………………900
MOH-ctrl……………………………900

Reuse of scrap: WIP-ctrl…………………………….900

DM-ctrl………………………………900
The accounting for scrap under process costing is like the accounting under job costing when
scrap is common to all jobs b/c process costing applies to the manufacture of masses of identical
or similar units. The high cost of scrap focuses manager’s attention on ways to reduce scrap to
use it more profitably.

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